Penalizing Cartels: The Case for Basing Penalties on Price Overcharge

47 Pages Posted: 8 Oct 2014

See all articles by Yannis Katsoulacos

Yannis Katsoulacos

Athens University of Economics and Business

Evgenia Motchenkova

VU University Amsterdam - Department of Economics; TILEC

David Ulph

University of St. Andrews - School of Economics and Finance

Multiple version iconThere are 2 versions of this paper

Date Written: October 2014

Abstract

In this paper we set out the welfare economics based case for imposing cartel penalties on the cartel overcharge rather than on the more conventional bases of revenue or profits (illegal gains). To do this we undertake a systematic comparison of a penalty based on the cartel overcharge with three other penalty regimes: fixed penalties; penalties based on revenue, and penalties based on profits. Our analysis is the first to compare these regimes in terms of their impact on both (i) the prices charged by those cartels that do form; and (ii) the number of stable cartels that form (deterrence). We show that the class of penalties based on profits is identical to the class of fixed penalties in all welfare-relevant respects. For the other three types of penalty we show that, for those cartels that do form, penalties based on the overcharge produce lower prices than those based on profit) while penalties based on revenue produce the highest prices. Further, in conjunction with the above result, our analysis of cartel stability (and thus deterrence), shows that penalties based on the overcharge out-perform those based on profits, which in turn out-perform those based on revenue in terms of their impact on each of the following welfare criteria: (a) average overcharge; (b) average consumer surplus; (c) average total welfare.

Keywords: Antitrust Enforcement, Antitrust Law, Cartel, Oligopoly, Repeated Games

JEL Classification: L4, K21, D43, C73

Suggested Citation

Katsoulacos, Yannis and Motchenkova, Evgenia and Ulph, David, Penalizing Cartels: The Case for Basing Penalties on Price Overcharge (October 2014). TILEC Discussion Paper No. 2014-037 , Available at SSRN: https://ssrn.com/abstract=2506647 or http://dx.doi.org/10.2139/ssrn.2506647

Yannis Katsoulacos

Athens University of Economics and Business ( email )

Evgenia Motchenkova (Contact Author)

VU University Amsterdam - Department of Economics ( email )

De Boelelaan 1105
1081 HV Amsterdam
Netherlands

TILEC ( email )

Warandelaan 2
Tilburg, 5000 LE
Netherlands

David Ulph

University of St. Andrews - School of Economics and Finance ( email )

University of St Andrews
St. Andrews, Scotland KY16 9AR
United Kingdom

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